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Tuesday, November 5, 2013

Lower markets on services industry report

Dow fell 34, decliners over advancers 3-1 & NAZ was off 4. The MLP index lost 4 taking it to the 453s & the REIT index was off 3 to the 278s. Junk bond funds were weak & Treasuries sold off. Oil fell to trade
near the lowest price in more than 4 months amid speculation
crude inventories increased for a 7th week in the US. Gold held near the lowest price in more than 2 weeks, before a
report on the US services industry that may provide clues on
the timing of the reduction in stimulus by the Federal Reserve (FED).

Activity at US service firms accelerated in Oct despite the
partial gov shutdown, boosted by a jump in sales & more hiring. The Institute of Supply Management says its service-sector index rose
to 55.4 in Oct, up from 54.4 in Sep. The index hit an 8-year high of 58.6 in Aug. Any reading above 50 indicates
expansion. A measure of sales fell jumped 4.6 points to 59.7 & a gauge of hiring rose 3.5 points to 56.2. The report measures growth in service industries, which cover 90% of the workforce, including retail, construction, health care & financial services. The pickup followed the group’s report last week that
showed manufacturing grew at the fastest pace since Apr 2011,
a sign purchasing managers were gaining confidence in the
expansion. The data indicate companies were looking beyond the
political infighting that closed the gov in early
Oct.

Home shoppers are getting another chance,
thanks to Big Ben. After 5
months of public speculation about when the FED would end its
housing stimulus sent mortgage costs to a 2-year high in
Sep, the FED last week pledged a
continuation of the bond buying responsible for last year’s all-time low 3.36% for a 30-year fixed loan. The 4-year economic expansion has been buttressed since
early 2012 by a housing recovery that lifted construction &
supported consumer spending. That rally was helped by borrowing
costs that fell to a record low in Dec. Demand for properties began to weaken after Bernanke said
in May that the FED could slow the pace of its bond purchases.
Speculation intensified in Jun & rates reacted with a surge
that sent pending home sales tumbling 9% in the 4
months thru Sep to the lowest level of 2013 while home
affordability fell to a 5-year low. Homebuilders, among the
biggest beneficiaries of monetary stimulus, have slumped more
than 20% since a May peak.

Premier Li Kiqiang said China needs
7.2% growth to keep unemployment stable & signaled
reluctance to widen the budget deficit or ease monetary policy
to ensure expansion. Expansion at that pace would create 10M jobs a year
to maintain the urban registered jobless rate at about 4%, Li said in an Oc 21 speech.
China’s growth has entered a stage of medium-to-high speed,
meaning about 7.5% or above 7%, Li said.
The comments, consistent with other gov statements, provide more context for targets in the coming years
ahead of the Communist Party’s 4-day conclave starting Nov 9
that will consider reforms aimed at maintaining the pace of
growth. Leaders are entering the summit with the economy on an
upswing, indexes of manufacturing and services in October show. “Using the deficit and issuing money to stimulate
investment can produce results that year, but corresponding
operational room is needed to implement fiscal and monetary
policies,” Li said. “More importantly, this kind of short-term
stimulus is hard to sustain.” A Jul commentary from the official Xinhua News Agency said
China needs growth of at least 7.2% to keep urban
unemployment at about 5%, citing “authoritative”
estimates. Li told economists that 7% is the “bottom
line” & the nation can’t allow growth below that.

Stocks are drifting lower with nothing particularly exciting going on. The stocks are being sold following a strong services report that might give the FED an excuse to begin tapering it bond purchases. This is not a good market when the main influence is the FED continuing its bond buying program to help keep interest rates low. There is a business world out there. Companies are supposed to generate higher sales which bring increased profits. At least that's how the a stock market worked in the past. Later this week, the ECB will make a decision about its low interest rate flat & then comes the delayed Oct jobs report.